It was just hell and damnation in the financial markets last March. But not for long. In the meantime, stock prices have been rising for weeks. What worst crisis in decades? Why lower profits for companies? Nothing wrong; the rates are rising!
The development on the stock market is not in proportion to real economic developments. Those financial markets are completely blown away. I have a few explanations. But even more worries.
This is unsustainable and unwise. Money has to go to people; it should not go to money.
Stock market recovery during economic drama
The classic investor response to current developments is that financial markets “see through the cycle” and are ahead of economic developments. This would explain why stock prices went down so fast in March; they were a bit behind and had to catch up on some time. And the recent recovery would have been prompted because it is actually not all that bad.
But it is not all that easy. Business earnings expectations and economic expectations have only been revised downwards. Unemployment rates have skyrocketed at an unprecedented rate. Economic contraction, and the duration of the recession also seems to be able to be even more negative.
ECB President Christine Lagarde did an extra bit this week by predicting that the European economy would shrink by 8 to 12 percent this year.
Bad news? More money from central banks
But where does this cheerfulness and optimism on the financial markets come from?
First, bad news is grist to investors today. On the day that the strongest rise in unemployment ever was announced in the US, stock markets showed a huge increase. Bad news means that there is a good chance that more money will be pumped into the economy by central banks and governments.
The counter is currently at $ 15 trillion. Of this, about 6 trillion comes from central banks and 9 trillion from governments. Much of this money, especially that of central banks, remains in the financial system.
Then why are we doing this? Especially to ensure that those who have an interest in saving the current system are not harmed. In other words, we save people with (sometimes a lot of) money.
Not a problem for Amazon
Investors are also optimistic because some companies are hardly affected by the corona crisis. In fact, the Amazons, Googles and other tech companies see their turnover increase. Let this also happen to be the companies with a solid balance sheet. They are at the forefront of the price recovery.
And, finally, the markets are shortsighted. So much so that, for example, a slower rise in unemployment (but still a historically rapid increase) is interpreted as a positive sign: the crisis is really not as bad as expected. So I like a few more.
L’argent pour l’argent
The many trillions pumped into the economy should not prop up the financial markets. They are intended to support the real economy, ensure that there is no financial crisis and that money gets people out of trouble. But that only happens to a limited extent.
Of course it does with certain measures that help businesses and households get through the worst of the crisis, but much of the six trillion central banks do not. We could also very well use that money to achieve the sustainable development goals. Or to build a completely new hydrogen infrastructure in Europe, or to make all houses more sustainable. I will only mention a few cross streets.
Now, however, nothing is done with it other than to ensure that financial values do not diminish. Throwing money to save money. And that has nothing to do with the real economy. With things that are important to people. For our future. The more money is spent to save capital, the smaller the support for it.
And the greater the debt we ultimately have to pay.